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September 13, 2006

Mixi -- Japan's top social network -- goes IPO

In Japan, the hot
news is the IPO of Japan's largest social networking site (SNS), Mixi. Launched in February 2004, the site has grown
to 5 million members in July, up from just 3.4 million in March. I thought I’d
take a closer look at the first real public market valuation of a social
networking service in detail, primarily because it provides insight into the
operations, valuation, and potential for SNS.

Mixi has forecasted
that revenues to be ¥4.8 billion or US$40.8 million with pretax profit of ¥1.7
billion or US$ 14.4 million. Advertising accounts for 80% of the revenue, with
the rest coming from service fees. In the IPO, it raised US$93 million. Update: I made a major mistake, basing the valuation on the amount raised, not the value of the IPO shares. Here are the correct numbers -- many thanks to commenters Dan & Shin for the corrections. The IPO share price was ¥1.55 million for 70,500 shares, for a total IPO valuation of¥109.2 billion, which is just under US$ 1 billion. At Friday's close, the share price was at ¥3.12 million, making Mixi's valuation just under ¥2 billion. a little under US$1 billion. Another
way to think of it is US$18.60 US$ 200 for each user in the network at the IPO price.

A rough back-of-the-envelope
would value MySpace’s 100 million users at US$1.8 billion US$20 billion and Facebook’s 7.5
million users would be worth $139.5 million US$1.5 billion. As a commentator reports beow, Facebook recently raised a round of financing valuing the company at $500 million pre. Granted, the I’m not taking into
account the multiplicative network value of additional members, so this is
likely undervaluing the value of MySpace’s and Facebook’s audiences.

So how hot is the stock?
The IPO price per share was 1.55 million yen (US$ 13,200) which rose to 3.15
million yen (US$26,800) per share in bidding, doubling the price (Note that
these are unfilled bids as the Japanese stock market doesn’t allow trading on
the first day of an IPO unless buy bids match sell bids).

So watch this stock in
the next few days/weeks to see how the market reacts to it. I’ll be looking to
see not only the stock price, but also how the company performs in terms of
monetizing the users.

Here’s some background
on the features that make Mixi unique and successful in Japan:

-Invitation-only participation. Most of the Mixi users I spoke
with said that they use Mixi only to connect with their friends. The most used
feature – the “diary”. They update their own and frequently check their friends’
diaries. While essentially a blog, many users don’t consider it one, as it’s really
only for their friends.

-Anonymous profiles. As a rule, the Japanese don’t
use their real names on their profiles. While this is also often true in North America, I found it interesting that users made it
a point to tell me that they didn’t use their real names. Also, very few of the
Mixi users I spoke with said that they had ever interacted with people they did
not know, the complete opposite of the behavior usually found on MySpace.

-Heavily mobile-based. Several users told me that text
messaging updates actually facilitated participation as they were more comfortable
writing than engaging in face-to-face conversations.

-Groups. Mixi has over 900,000 groups
that users have created, which can in turn be sorted by date created or
popularity. This simple sorting creates momentum for the Mixi groups, versus the
static organization of groups on MySpace.

-Structure. Unlike MySpace, Mixi is highly
structured with minimal ability to change the layout. The users I spoke with
liked the structure, as it created certainty about how users were to interact
with each other.

Update: Several users reminded me of a key feature -- the ability to see exactly who has viewed the page, allowing them to keep track of their social connections.

For
additional background on Mixi, here are a couple of good resources: Metropolis
Magazine’s article “In
the Mix” a great, detailed overview of how social networking is used in Japan. Pete
Cashmore at Mashable
also gives a nice overview of Mixi while News.com has a quick
overview article.

Comments

Certainly a harbinger for the future of social networks. But what does it mean for users? It's great for the company, but it's people creating profiles who help build the value, one member at a time. Will they be rewarded with enhanced functionality...or advertising clutter?

Your calculations are way off. $93 million is how much Mixi raised, not how much they are worth. The company's market cap is around 1.6 billion right now. ($1.6 billion)/(5 million users) = $320 per user. Extrapolating, this suggests a market cap of 2.4 billion for Facebook, and (if most Myspace users were real) 32 billion for Myspace.

There is no rule which prevents trading on the first day of an IPO, it is just that buy and sell orders have to match in volume. At the beginning of the first day, there were 19 buy orders for every one sell order, and the buys greatly overnumbered the sell orders for the whole day, with the bids at 3.15M, up from 1.55M. (At the end of the trading day buy orders still outnumbered sell orders by about 2 to 1)

Day 2 saw strong selling pressure and the first trades were executed at 2.95M, and went as low as 2.56M before ending the day with a strong rally to finish at 3.12M.

It'll be interesting to see who the sellers were, I would guess that at least some of the selling was from the VC investors who held the stock. Some of the VC shareholdings are not subject to a lock up on this stock.

IPO valuation was JPY109.2B (a shade under $1B), at JPY1.55M with 70,500 outstanding shares. At JPY3.12M (friday's close), the valuation is just shy of $2B.

As Dan says, that puts a price in the three hundred dollar range per _account_ (obviously accounts do not equate with users).

That would put MySpace up in to $30-40B range.

The market apparently thinks a PER of above 200 is warranted for Mixi. But is there really enough growth potential here to warrant such a high PER? Probably not, but inflated PERs are common for internet stocks on the Japanese emerging markets exchanges, and a comparison with Japanese internet stocks would not make Mixi look overpriced.

Further, many (most?) Japanese internet stock IPOs have seen post-IPO rallies (peaking at several times the IPO offer price) trailing off quickly into a gradual decline back down to the offer price or even lower over the first 6 months or so.

Charlene Li writes that Mixi is valued at $18.60 per user implying that MySpace's 100 million users is worth $1.8 billion. Using Charlene's metrics, it also means that Facebook is only worth $139.5 million - which is far lower than the $500 million valuation that it raised its recent round of funding at!

I don't know anything about the fundamentals of the company, but my sister-in-law (who is Japanese and lives in the US) and her freinds LIVE on Mixi. This thing is a complete craze, so I suspect it will continue to do well. They have their own IM console, and I tell you, they use it exculusively. She uses it to find out everything, and she recently came to visit my town and introduced ME to a new Thai restaurant courtesy of her Mixi connections. Impressive.

I think facebook would be good for yahoo and not for money wise as facebook has made no profit and with google now interested well have to see what happens we know who has more money but who has more guts.

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